Taxation and Public Finances

Introduction

The Jersey Government has to raise revenue to finance expenditure and, to be prudent, to build up reserves to meet expected future liabilities and also to meet costs that cannot be anticipated, such as the recent pandemic.

The key documents on public finances are the annual government plan and the analysis by the independent Fiscal Policy Panel.

Financial principles

The Government Plan 2024 - 2027 sets out seven financial principles to be used as a framework for decisions making. In summary –

1 Sustainability, stability and wellbeing - including rebuilding the Stabilisation Fund and increasing the Strategic Reserve in line with Fiscal Policy Panel advice.

2 Funding public services through balanced budgets - operating budgets after depreciation should be balanced across the plan and departmental base budgets should be maintained in real terms, except where changes have been identified and agreed.

3 Affordable and deliverable investment - additional funding for services should only be allocated if a source of funding has been identified and agreed and any investment in services or on projects should have a credible delivery plan, to avoid allocating more funds than required.

4 Delivering value for money - the Government should continue to identify and deliver recurring efficiencies every year, but only rely on the reduction in spend if it is clear how they will be achieved; Government should invest where required to improve value for money, where benefits can be clearly demonstrated; and expenditure and assets should support outcomes for islanders with returns maximised across the plan to support effective and efficient delivery of strategic objectives.

5 Reasonable fees and charges – reasonable contributions should be made to the full cost of providing services.

6 Restrained approach to borrowing - any additional borrowing should be due to a clear need, with an agreed funding strategy, and made in line with the published Debt Strategy, for specific purposes such as capital investment, temporary costs of the economic cycle, and active fiscal stimulus – short-term, targeted, and timely (e.g. financing the Fiscal Stimulus Fund) and deferral of income and cashflow, although potential losses and financing costs need to be identified. Alternatively, overdraft facilities could be used.

7 Preserving the value of the Government balance sheet - the net asset value of Government should be maintained or increased.

Tax policy principles

Jersey has long-established principles on tax policy that have been agreed by the States Assembly.

1 Taxation must be necessary, justifiable and sustainable.

2 Taxes should be low, broad, simple and fair.

3 Everyone should make an appropriate contribution to the cost of providing services, while those on lowest incomes are protected.

4 Taxes must be internationally competitive.

5 Taxation should support economic, environmental and social policy.

6 Taxes should be easy to implement, administer and comply with at a reasonable cost.

7 No individual type of taxation will meet all these principles. But overall, the tax regime should represent a sustainable balance of them.

Government income and expenditure

Government income comprises –

• Tax revenue.
• The net income of Government trading bodies, that is income less expenditure.
• Income from investments.

The Government can also borrow money, which is normal practice to finance projects that have a long life.

Expenditure is largely to meet the cost of basic services, such as health and education. The Government also a big programme of capital investments.

The following table shows forecast government tax revenue in 2024 as set out in the Government Plan 2024 - 2027.

“Other” includes dividends, island-wide rates and a contribution of £30 million from Andium Homes, the Government-owned social housing provider (which can be regarded as the equivalent of notional interest on the value of the housing stock transferred to it). This category is not strictly tax revenue but the Government includes it in the table to show what is in effect current income which can be matched with current expenditure.

Jersey does not publish public expenditure figures by activity, but rather by government department. The following table shows the planned figures for 2024 as set out in the Government Plan 2024 - 2027. The figures are net, after deducting income received by the department.

Broadly speaking the Government Plan shows a balanced budget in 2024 and 2025.

Government balance sheet

The following table shows the projected balance sheet for the Government as at the end of 2024.

The table shows a healthy position.

The state of the public finances

Jersey’s Fiscal Policy Panel, a group of economists, provide the Government with independent advice on -

• the strength of the economy, the economic outlook and the economic cycle in Jersey
• the sustainability of public finances in the medium and long term including the net asset position
• fiscal policy including the balance of tax and spend and the use of the Strategic Reserve Fund and the Stabilisation Fund.

The Panel’s annual report is the most authoritative independent analysis of the state of the Island’s finances. The Panel published its 2023 Annual Report on 13 November. The executive summary included the following points on the public finances -

• On the basis of current spending commitments and forecast tax revenues, there will be a primary budget deficit in all years of the Government Plan, with spend on the public sector boosting demand further. Given the strong addition to revenues from banking profits and evidence of overheating in the economy this is an inappropriate fiscal stance. This forces demand offshore, carries risks to inflation and does not allow for the Government to build up its reserves, increasing its vulnerability to shocks.
• Jersey’s net asset position as a percentage of Gross Value Added (GVA) has declined since the last Government Plan from 168% of GVA in 2020 to 135% in 2022. The net asset position is projected to fall further to 122% of GVA by 2027. The Panel is concerned that the projected net asset position remains lower than pre-pandemic levels.
• The Stabilisation Fund is much depleted. The Strategic Reserve balance is forecast to decline as a share of GVA. In 2027, it is forecast to stand at £1,206 million, roughly half the minimum level recommended by the Panel. The Strategic Reserve is unlikely to be sufficient to meet a major crisis. It is disappointing not to see stronger commitment to add to the reserves, given the current and recent past strength of government revenues.
• Whilst the actuarial review for the Social Security Funds shows that they are in a good position under high migration scenarios, other health-related funds such as the Health Insurance and Long-Term Care Funds are likely to be exhausted by the 2040s, well before the end of the demographic transition that they are designed to mitigate. The review into the future of health and care funding is of critical importance.

International tax reform

Over the past four years, the Organisation for Economic Co-operation and Development (OECD) has been working to establish a new global tax framework, aimed at addressing the tax challenges arising from the increasing digitalisation of the economy. The Government of Jersey has been closely engaged in this process.

This international tax reform project is targeted and limited in scope, focussing on the world’s largest Multi-National Enterprises (MNEs). It comprises two pillars of OECD work.

Pillar Two establishes a framework for a 15% global minimum corporate income tax that applies to MNEs with annual global revenues of at least €750 million. The 15% minimum rate is calculated in a specific way based on financial statements and on a country-by-country basis. Importantly for Jersey, it contains a carveout for certain investment entities (such as funds). A number of major economies have already introduced legislation making this minimum tax effective from 2024.

Jersey is implementing the 15% Pillar Two regime from 2025 for accounting periods beginning on or after 1 January 2025. It will apply only to the large in-scope MNE groups. Jersey’s existing corporate income tax regime will continue to apply to all other companies.

The implementation of Pillar Two in Jersey will increase tax revenues from in-scope Pillar Two groups in relation to their accounting periods ending on or after 1 January 2025. Tax receipts will be included in the Budget from 2026.

Forecasting the future revenue impact of Pillar Two implementation is a complex exercise. Jersey has developed a “base case” approach to the forecast of the additional corporate income tax expected to be received from taxpayers in Jersey, following implementation of Pillar Two. This is the revenue that it is reasonably confident will be raised on a recurring basis for the foreseeable future. According to the Proposed Budget (Government Plan) 2025-2028 the estimated revenue for 2026, 2027 and 2028 is £50 million a year.

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